LLC Taxed as C Corp: Pros, Cons, and Election Process

Key Takeaways:

• Elective Tax Status:
  An LLC can opt to be taxed as a C-corp by filing Form 8832 with the IRS. This doesn't change its legal structure—it remains an LLC—but it changes how the entity is taxed.
• Separate Tax Entity & Filing Requirements:
  Once the election is made, the LLC is treated as a separate tax-paying entity. It must file an annual corporate tax return (Form 1120) and pay corporate income tax at the federal rate (21% as of 2024). Profits distributed to owners are then taxed again at the individual level as dividends (double taxation).
• Strategic Benefits:
  Electing C-corp taxation can lower the overall tax burden if the LLC earns high profits and plans to reinvest them. It also allows owners who are employees to receive wages (W-2) and access robust fringe benefits such as better retirement plans and healthcare.
• Investor Appeal & Growth:
  C-corp status is often more attractive to venture capitalists and private equity investors because it fits the typical structure they invest in. It also supports long-term growth strategies, including the potential to go public.
• Drawbacks & Complexities:
  The main downsides include the issue of double taxation and increased administrative complexity. Unlike pass-through entities, owners cannot deduct business losses on their personal returns, and additional federal and state compliance requirements come into play.
• Comparison to Other Tax Structures:
  While LLCs are typically taxed as sole proprietorships (single-member) or partnerships (multi-member), choosing C-corp taxation provides a different balance between tax rates, self-employment taxes, reinvestment flexibility, and access to benefits. This choice should be weighed against alternatives like S-corp taxation.
• Flexibility & Future Considerations:
  The election is not permanent—you can revert back to the default tax classification, although there may be a waiting period (60 months) before you can make another election. Importantly, the LLC maintains its limited liability protection regardless of the tax classification.
• Professional Assistance:
  For complex tax matters and strategic decisions, the article recommends consulting legal experts (such as those available through platforms like UpCounsel) who specialize in business tax structures.

An LLC taxed as a C-corp may be beneficial, depending on your particular business and how you'd like to gain capital for it. Your LLC will not be a corporation, but you can choose to have it taxed as a corporation for certain reasons.

Electing to Have Your LLC Taxed as a Corporation

LLCs are relatively new business structures in the U.S. They're the most flexible in terms of taxes. If you've formed an LLC, you can't treat it as a C-corp, unless you go through the legal process of making it a corporate entity. The IRS will allow you to file as a C-corp for tax purposes, but you have to comply with income tax rules that pertain to C-corps for a minimum amount of time.

There are different ways an LLC can approach taxes in order to save money for the company and its owner(s). If you're an LLC owner, you can choose to be taxed as a corporation instead of as a sole proprietorship or partnership.

Your LLC is taxed by default in one of the two following ways: 

1. As a single-owner/member LLC, which is taxed as a sole proprietorship, using Schedule C of your personal tax return
2. As a multiowner/member LLC, which is taxed like a partnership, using Form 1065, with each partner filing a Schedule K-1

How it's taxed depends on the number of owners, also known as members. 

If you choose for your business to be treated as a corporation for tax purposes only, you need to be aware of the following: 

• You make the election on Form 8832, via the IRS.
• You can file the form only if you're an eligible entity.  
• An LLC elects this to be an association, meaning it's eligible to be taxed as a corporation.
• You include a statement of consent with your form, which can be signed by one member (acting as all members, with their prior, recorded approval) or all members.
• You have to include the name(s) and ID number(s) of each owner/member; this means the employer ID for a multiowner/member LLC or the Social Security number for a one-owner company.

How the Taxation Process Works for an LLC Taxed as C Corp

When an LLC elects to be taxed as a C corp, it is treated as a separate tax-paying entity. This means that the LLC is responsible for paying corporate income tax on its profits, while any distributions to members (owners) may be subject to individual taxation. This is often referred to as "double taxation."

The process involves:

1. Filing Form 8832 – The LLC must submit this form to the IRS to elect to be taxed as a corporation.
2. Annual Filing of Form 1120 – The LLC will need to file a corporate income tax return (Form 1120) each year.
3. Paying Corporate Taxes – The business will pay taxes at the corporate level based on the current federal corporate tax rate (21% as of 2024).
4. Handling Distributions – If the LLC distributes profits to its owners, those distributions are treated as dividends, which are subject to individual income tax.

This structure can simplify tax reporting for some businesses while offering opportunities to minimize self-employment taxes.

Reasons to Elect for C-Corp Taxation

Pension funds are used to fund many venture capitals. The Internal Revenue Code makes it hard for pension funds to invest into entities that are taxed as partnerships if they carry on an active business. If your eventual goal is to get private equity money or venture capital, you should elect to be treated as a C-corp for tax purposes.

If you're the owner of an LLC that's taxed as a partnership, you can't be an employee of your company. You'll get a K-1 at the end of the tax year, not a W-2. For partnerships, you can't file your own taxes until you receive a K-1 from your company. In addition, the company has to first complete its partnership tax return before you can complete your K-1. Depending on how complex your company structure is, this can take some time.

If you're an employee of your company, you'll simply need your W-2 to file your taxes. If you get dividends, you'll also need a 1099-DIV.

Owners of S-corps and partnerships are limited in the amount they're allowed to deduct for the following benefits: 

• Life insurance
• Medical
• Child care
• Education
• Retirement plans 

C-corp owners don't have these same limitations. 

If you want a simple business management structure, you can first create an LLC and then file Form 8832, which elects C-corp taxation for an LLC. If you're an active owner in a C-corp, you're considered to be an owner as well as an employee. You can then treat the compensation you receive as wages instead of dividends, so your compensation will only be taxed once instead of twice.

Most business owners are looking for ways to save money, and this includes the amount of taxes they pay. If the pros outweigh the cons in being taxed as a C-corp (without all the legal complexities that come along with operating as a corporation), you might consider it for your LLC.

Advantages of LLC Taxed as C Corp

Opting for C corp taxation can provide an LLC with several strategic benefits:

• Lower Corporate Tax Rate: The federal corporate tax rate is often lower than individual tax rates, especially for high-earning LLCs.
• Access to Fringe Benefits: Owners who are employees can access better retirement plans, healthcare, and other tax-deductible fringe benefits.
• Retained Earnings: Profits can be reinvested in the company without being immediately taxed as income to the owners.
• Venture Capital and Investor Appeal: C corps are often preferred by investors due to their familiar structure and clear separation between ownership and management.
• Employee Stock Options: Easier implementation of stock incentive plans to attract and retain key employees.

Disadvantages of LLC Taxed as C Corp

While there are advantages, electing C corp taxation for an LLC also comes with potential downsides:

• Double Taxation: Corporate profits are taxed at the entity level, and dividends paid to members are taxed again on their personal returns.
• Complex Compliance: C corps must comply with additional federal and state filing requirements compared to pass-through entities.
• Loss Limitations: Owners may not be able to deduct business losses on their personal tax returns as they could with a pass-through entity.
• Accumulated Earnings Tax: Excess retained earnings could trigger additional taxes if the IRS deems they are not being reinvested appropriately.

Comparing LLC Taxed as C Corp to Other Business Tax Structures

Business owners should compare an LLC taxed as a C corp to other tax classifications before making an election:

Each structure has unique tax implications that can significantly impact the business's profitability and the owner's personal tax situation.

When Should an LLC Consider C Corp Taxation?

Electing C corp taxation is often most advantageous for LLCs in the following scenarios:

• High Earnings: When the LLC generates substantial income and the owners wish to reinvest profits rather than distribute them.
• Employee Benefits: When the owners seek robust health, retirement, and fringe benefits.
• Seeking Investors: When the business is positioning itself to attract venture capital or outside investors.
• Long-Term Growth: When the company’s goal is to scale significantly and possibly transition to a publicly traded entity.

Carefully evaluating both short-term and long-term goals can help determine if C corp taxation aligns with the LLC’s business strategy.

Frequently Asked Questions (FAQ)

1. Can an LLC taxed as a C corp revert to its default tax classification?Yes, but there are limitations. An LLC taxed as a C corp can revoke the election, but it may be subject to a 60-month restriction before making a new election.

2. Will I still have limited liability protection with an LLC taxed as a C corp?Yes, the LLC retains its limited liability protection regardless of its tax election.

3. How does an LLC taxed as a C corp handle self-employment taxes?Owners treated as employees receive wages, reducing the need to pay self-employment taxes on all profits.

4. What tax forms does an LLC taxed as a C corp need to file?The LLC must file IRS Form 1120 for corporate taxes and may issue W-2s for employee wages and 1099-DIV forms for dividends.

5. Is electing C corp taxation a permanent decision for my LLC?No, but changing the tax election back requires careful planning due to IRS restrictions and potential tax implications.

If you need help with taxes related to LLCs, C-corps, or other business structures, you can post your legal need  on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.